How can procurement risk be better controlled? How can contracts be
let and managed more effectively?

Discussion:

The Federal Government's failure to adequately address the risk in the
acquisition of many major capital assets is well known and has consumed
many pages of newsprint. The Commission on Government Procurement addressed
the issue in 1969. The Commission's Report led to the establishment of
the Office of Federal Procurement Policy in the Office of Management and
Budget in 1974. In 1976, OMB Circular A-109, Major Systems Acquisition,
was issued to provide guidance to agencies on reducing the risk through
good planning and management of the procurement.

However, compliance with A-109 and periodic GAO and Congressional concerns
were largely ignored by most agencies, and a disciplined capital asset
acquisition process was neither implemented, nor enforced, in most agencies.
Examples of large acquisitions that have made recent headlines include
FAA's Air Traffic Control System and IRS's Tax Systems Modernization (see
separate paper that provides a synopsis of this project). There have been
too many others.

As part of the drive to balance the budget and respond to the growing
volume of taxpayer demands for a greater return for tax dollars spent,
the President and Congress have put in place a framework to improve the
way agencies annually acquire $65-$70 billion of new capital assets.

The legislative framework consists of three parts:

The Government Performance and Results Act of 1993 (GPRA), designed
to help ensure that agencies have clear missions and that program objectives
and annual goals are clearly defined - with resources focused on meeting
performance goals in annual and five year plans.

The Clinger-Cohen Act of 1996, designed to ensure that information
technology (IT) acquisitions support agency missions developed pursuant
to GPRA. The act requires the implementation of a performance-based planning,
budgeting, and management approach to acquiring IT assets.

The Federal Acquisition Streamlining Act of 1994 (FASA), Title V,
established that agencies should achieve at least 90 percent of the cost,
schedule, and performance goals used to justify funding for a major acquisition.
Acquisitions not achieving 90 percent of goals are to be reviewed by the
agency head for a decision to continue funding or terminate the acquisition.

A team of more than 80 staff from 14 agencies and interagency groups, including
the Chief Financial Officers Council, and the Chief Information Officers
Council, integrated the legislative initiatives with administration initiatives
to develop a unified process to acquire and manage capital assets across
the federal government. That process is contained in the Capital Programming
Guide, which OMB issued as a supplement to OMB Circular A-11 in July
of 1997. The guide provides best practices to ensure that capital assets
contribute to the achievement of agency strategic goals and objectives
within budget limitations. The General Accounting Office helped develop
the guide by studying best practices from state and local governments,
the federal government, and private industry.

The best practices contained in the Guide indicate that there
are three key elements to controlling the procurement risk and managing
contracts more effectively. They are: (1) good up front planning to clearly
identify the best capital asset to fulfill the performance gap; (2) stable
funding; and (3) good acquisition planning that results in limited development,
makes effective use of competition and incentives, and requires the use
of a performance-based management system to provide program managers and
others information on the achievement of, or deviation from, goals during
the procurement process. These three key elements have been missing in
the headline grabbing acquisition failures.

The planning phase of the capital programming process should first determine
if cost-beneficial means for meeting program performance requirements other
than a capital asset are available. If not, the agency should create an
integrated project team (IPT) to manage the acquisition process. The team
should determine:

Availability--Can the market provide capital assets that partially
or fully meet program requirements? How much of the need can be fulfilled
without the need for developing new technologies or incurring other significant
risk?

Affordability--Are the assets affordable within the budget limits?
If the full requirement is not affordable, can it be divided into stand
alone useable segments that are affordable?

Costs and Benefits--For those alternatives that are affordable within
budget limits, which are the most cost-beneficial, taking into consideration
life-cycle costs, and should be included in the proposed assets to be considered
for inclusion in the agency's budget.

This process starts with a strategy to review the market and ends with
the development of an acquisition plan, outlining the best approach to
acquire the recommended asset. There should be risk analysis that identifies
how risk for the different parts of the project will be isolated, minimized,
monitored, and controlled. High risk should be accepted only insofar as
it can be justified by high expected returns, and only if project failure
can be absorbed by the agency without loss of service capability or significant
effect on budget. If funding is approved in the budgeting phase, the acquisition
plan will be implemented in the procurement phase. It is critical that
before requesting funding and entering into a contract that the agency
knows what it can buy and how much it will cost.

As discussed in another paper on full funding of asset acquisitions,
a funding mechanism that ensures that the project will be funded as planned
is critical to holding the contractor and the government management team
accountable for achieving the cost, schedule, and performance goals. When
a stable funding stream is assured, provided that the project achieves
its goals, the opportunity to use performance-based fixed price contracts
is increased because the contractor can implement more efficient work planning
and management practices. When the work is not funded as planned, because
incremental funding levels are changed from year-to-year, the contractor
must make adjustments to the original plan that change the original cost
and schedule goals and sometimes the performance goals. It has been demonstrated
in a DOD study that the cost to the government to achieve the original
performance goals will be three dollars for every dollar the planned funding
levels are reduced . When the funding is changed the contractor can no
longer be held accountable for achieving the proposed results.

Once Congress has approved funding and OMB has apportioned it to the
agency, the procurement phase begins. The first action is for the integrated
project team (IPT) to review and update, if necessary, the acquisition
plan to ensure that the risk management techniques considered in the planning
phase are still appropriate. The risk can be reduced by an acquisition
strategy that:

uses fully tested pilots or prototypes, where necessary, before going to
production;

appropriately allocates risk between the government and the contractor;

establishes clear measures of accountability for project progress;

uses a performance-based acquisition management system; and

ties contract payments to accomplishment.

Probably the greatest risk factor affecting contract performance is the
amount of development needed for the project. Projects requiring full scale
development have the greatest potential to experience cost and schedule
overruns and not meet performance goals. Whenever possible, the purchase
of commercial and non-developmental items to satisfy needs is preferred.

The effective use of competition and financial incentives is another
means to reduce the risk. If given the opportunity, industry can be helpful
in proposing innovative solutions. Requirements in solicitations should
be written not as detailed design specifications, but rather as broad-based
statements of objectives or targets for asset function and performance,
including long-term operating and management costs, that allow sources
to propose various alternative solutions to meet the agency's needs.

The project cost, schedule, and performance goals established through
the planning phase of the project and approved in the budgeting phase serve
as the basis for the procurement of the asset as well as the basis for
assessing risk. Performance-based management systems (earned value, which
was developed by the Federal Government and adopted by industry) should
be used to provide managers with the contract status information they need
to judge the achievement of, or deviation from, goals until the asset is
accepted and operational. If the goals are not being met, performance-based
management systems allow for early identification of problems, analysis
of potential corrective actions, estimates of changes to the original goals
needed to complete the project, and the information necessary for agency
portfolio analysis decisions. If corrective actions cannot bring the project
to within 90 percent of its cost, schedule, and performance goals, agencies
need to consider what other action is appropriate (e.g., rebaselining or
terminating the contract).

Options:

The Commission could support the efforts to require good capital programming
practices by recommending that OMB and Congress establish criteria that
they could use to ensure that agencies demonstrate planning expertise in
their requests for funding new capital assets. Failure to meet these good
acquisition planning criteria would mean that the project would not be
approved for funding.

The Commission could support the requirement in the Capital Programming
Guide that agencies use an earned value management system to manage
all major capital asset acquisitions and that OMB and Congress review the
acquisition status information at least once a year, or as deemed necessary,
for acquisitions not achieving 90 percent of goals. Acquisitions that do
not meet objectives in a cost-effective manner should be recommended for
termination.